Budget 2016: What it means for Australian business
Chris Sheedy reports on the implications for business from Australia’s 2016 Federal Budget.
Any responsible analysis of an Australian Federal Budget must begin with one caveat - the success or failure of its central objectives very much depend on influences that are completely out of its control. The major threat, or opportunity, is the relative economic health of other territories, particularly China and the US.
So what are the objectives of the 2016 Federal Budget, developed and handed down, in the politically charged atmosphere of an upcoming election, by the Hon Scott Morrison MP, Treasurer of Australia?
According to Morrison, the goals of the Budget are lofty and numerous. Headline business-related objectives include:
- Boost jobs, innovation and growth via tax cuts for SMEs and a 10-year enterprise tax plan, along the way making Australian company tax rates more competitive, especially amongst our Asian neighbours.
- Combat tax avoidance by multinationals to ensure revenue earned in Australia is taxed in Australia.
- Reduce the deficit from almost $40 billion to $6 billion by 2020.
How does it all work?
Tax relief comes in the form of a reduction in the company tax rate to 27.5%, for companies with an annual turnover of less than $10 million, from the new financial year.
Around 870,000 SMEs stand to benefit from this change. Then all companies of all sizes will see their tax rates fall gradually to 25% by 2027, but this tax cut will not begin to kick in until the very distant future - in 2023. That part of the deal is an almightily long-term promise in the current political climate.
The war on multinational tax avoidance, a political theme we are seeing around the globe, will be fought on numerous fronts. A new Tax Avoidance Taskforce will be set up within the Australian Tax Office (ATO) to keep an eye on multinationals and high-wealth individuals.
A Diverted Profits Tax will be imposed on businesses shifting Australian profits offshore. New protections will be put in place for whistleblowers and penalties for breaches of tax reporting obligations will be increased, in some cases 100-fold.
Importantly, but far from conclusively, Regulatory Reform Bills intending to simplify our tax system will be also introduced to Parliament.
What does the business world have to say about the recent announcements?
In response to the 10-year goal of lowered company tax across the board, Deloitte Australia says, “Australia currently has the seventh highest company tax rate of the 34 OECD countries, and a rate that is much higher than our Asian neighbours. The intention is that Australia move to the ‘middle of the pack’ on company tax rates. Whilst this ten year plan is somewhat complicated in its implementation, the trend to a lower tax rate is to be encouraged.”
“However it must be noted that many countries with which Australia is competing on the global stage already have a company tax rate less than 25 per cent, and this downward global trend is expected to continue while significant changes to the Australian rate will not apply for the better part of a decade.”
KPMG’s National Managing Partner, Tax, David Linke, says he welcomes the proposed reduction in the corporate tax rate, but a transition over such a long period “is likely to result in Australia falling further behind the tax rates of other capital-importing countries”.
“Increased foreign investment is particularly important for our living standards in the future,” Linke says. “It cannot be stated often enough that a significant portion of the benefit of a reduction in the company tax rate flows through to higher real wages. This measure will ultimately give businesses greater incentive to invest.”
“All-in-all, what has been lost in the Federal Government’s economic plan is the opportunity for grand tax reform including a review of consumption taxation. One cannot see this happening for at least 5 years and possibly a decade. This is what we truly need.”
EY Australia says the tax concessions for SMEs, as well as the heavier policing of multinationals, will drive the core of what is essentially a stimulus effort. “The Government will encourage growth in small businesses by lowering the corporate tax rate immediately and extending other concessions, such as the immediate deductibility of certain expenditure,” EY’s report says. “Although large businesses have the promise of a future 25% corporate tax rate in the 2026-27 year, they will face significantly greater penalties and tighter anti-avoidance rules before they get there.”
PwC says the corporate tax rate cut is only a start, and must be complemented by a structural reform of taxation in order to stabilise the tax base and encourage, rather than penalise, growth, investment or incentives.
“While the politics of an extended phase in and prioritisation of small business is understandable, these constraints dampen the scale and pace of any economic dividend,” the PwC report says.
General opinion is that the 2016 Federal Budget is a responsible one thanks to its avoidance of the types of politically driven cash-splashes we have seen in recent years. But unless we experience a perfect global economic climate for the next several years, many believe, the house of cards could too easily come tumbling down.